Monday, August 19, 2013

Austerity v Keynesianism

John Quiggin has a short article in Crikey on the economic theories supported by Rudd and Abbott and makes the excellent point that:

The only major governments to undertake and sustain Keynesian fiscal stimulus were those of China and Australia. Supporters of the classical view have sometimes argued that Australia’s stimulus had no effect, and that our economy was rescued by strong demand from China. This amounts to the nonsensical claim that fiscal stimulus in China was effective enough to provide a substantial flow-on benefit to Australia, but that fiscal stimulus in Australia had no effect.

Quiggin also contends that Labor has conceded too much ground to the austerity argument:

The stimulus package introduced in 2009 included, quite appropriately, a strategy for a return to surplus as the economy recovered. Unfortunately, after committing to an optimistic timetable, former treasurer Wayne Swan treated the return to surplus as an end in itself, not a tool of macroeconomic management. This effectively conceded the ground in the macroeconomic debate to Abbott and the opponents of Keynesian stimulus.

To win the election Rudd needs to move beyond attacks on the specifics of Abbott's policies (or the lack thereof). He must explain why the Keynesian and social democratic policies he espoused and implemented in his first term as PM are the right way forward for Australia, and why the Howard government policies of consistent surpluses, regardless of economic conditions, represent a recipe for disaster next time there is an economic crisis.

Abbott, he contends, is a committed austerian:

Although Abbott presents himself as favouring "practical solutions to practical problems" rather than "market theory", his position is derived from the "classical" free-market economic theory that held sway before the Great Depression, and was revived as "New Classical economics" in the 1980s. In the classical view, recessions and depressions in a market economy are self-correcting. Government attempts to stimulate the economy can do no good, and may do positive harm by "crowding out" more productive private investment.